Gallagher, Gardner, Swan ('13) - Gov

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS doi:10.
1017/S0022109013000203
Vol. 48, No. 2, Apr. 2013, pp. 427458
COPYRIGHT 2013, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195
Governance through Trading: Institutional Swing Trades and Subsequent Firm Performance
David R. Gallagher, Peter A. Gardner, and Peter L. Swan
Abstract
Using unique daily fund-manager trade data, we examine the role of institutional trading in inuencing rm performance. We show that short-horizon informed trading by multiple institutional investors effectively disciplines corporate management. Our focus is on short-term swing trades, sequences with three phases (e.g., buy-sell-buy). We nd swing trades increase stock price informativeness, are protable after costs, and improve market efciency. This increase in stock price informativeness is associated with subsequent rm outperformance. Trades are most benecial with optimal stock holdings that reect the information acquisition incentives of investors as well as liquidity costs.
I.
Introduction
This paper demonstrates that institutional investors can exert governance through trading a rms shares. In particular, we show that informed order sequences by institutional investors are associated with improved stock price informativeness and corporate outperformance over the next 12 months. We nd that the greater the strength of a particular institutional trade sequence and the larger the number of participants, the more prices reect fundamental value. In turn,
Gallagher, david.gallagher@cifr.edu.au, Centre for International Finance and Regulation, University of New South Wales, Sydney NSW 2502, Australia, Macquarie Graduate School of Management, Macquarie University, and Capital Markets CRC Limited; Gardner, peter.gardner@plato.com.au, Plato Investment Management Limited, 60 Margaret St, Sydney 2000, Australia; and Swan, peter.swan@unsw.edu.au, Australian School of Business, University of New South Wales, Sydney NSW 2052, Australia. We thank an anonymous referee for excellent insights and helpful comments and Doug Foster for his detailed feedback. We also thank Renee Adams, Jonathan Cohn, Alex Edmans (to whom we owe particular thanks), David Feldman, Ron Giammarino, Jarrad Harford, Craig Holden, Andr e Levy, Paul Malatesta (the editor), Ernst Maug, Mark Seasholes, Jianfeng Shen, Lesley Walter, Terry Walter, Geoff Warren, John Wei, and seminar participants at the European Finance Association Conference in Bergen, Norway, China International Finance Conference, 2009, Financial Integrity Research Network Research Day, University of Sydney Microstructure Meeting, University of Western Australia, University of Queensland, University of Adelaide, Reserve Bank of Australia, and Australasian Finance and Banking Conference. We gratefully acknowledge research funding from the Australian Research Council (DP0346064).
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better fundamental value translates into better managerial actions and higher subsequent performance. Neither standard models of governance nor previous empirical studies consider trading as a method of governance. Rather, they argue that concentrated blockholders attempt to exercise voice (Hirschman (1970)), either through direct intervention including extracting private benets of control (e.g., Zwiebel (1995), Barclay and Holderness (1989), and Laeven and Levine (2007)) or through corporate governance channels, such as voting or activism (e.g., Shleifer and Vishny (1986), Admati, Peiderer, and Zechner (1994), Maug (1998), and Kahn and Winton (1998)). In contrast to this conventional view, authors such as Admati and Peiderer (2009), Edmans (2009), and Edmans and Manso (2011) have recently advanced the threat of exit as a mechanism enhancing rm value (also known as the Wall Street walk). Specically, they claim that informed trades drive stock prices to fundamentals, dependent on corporate managerial actions. With stock price more sensitive to these actions, stock-incentivized managers exert more effort on behalf of shareholders, thereby improving performance. We refer to this phenomenon as governance through trading. This term, governance, acknowledges that these investor trades do indeed improve rm value, rather than simply exiting a stock position that could be nondisciplinary in nature. This alternate theory represents a new channel, enabling empirical tests to determine how effective are multiple blockholders trades on correlated signals of private information in driving future corporate performance. This performance enhancement is due to better managerial motivation. Stock prices fall more severely in response to bad actions and rise more rapidly in response to good actions as stock price informativeness improves. Governance through trading credibly rewards (penalizes) the stock-incentivized manager, who ex ante has greater incentive to put in effort by means of costly hidden actions. What is unusual about this theory, as opposed to the traditional theory, is the relative lack of empirical studies that attempt to provide detailed empirical tests. To ll this void requires not only uniquely rich data but also identication of unusual trading sequences that form the basis of our event studies. Our data are ideal for testing the theories for two reasons: they are high in frequency, permitting identication of sequences, and they include data on blockholders below 5%. In order to identify our informed order sequences, we use a unique and proprietary data set of daily institutional trades of fund managers, including transaction costs and executing broker details, as well as their month-end portfolio holdings. These unique data enable us to specify each funds trade quantities, trade types (buy/sell), and the post-transaction costs performance of each trade. The data also enable nely detailed examination of every possible pattern of daily trades by every identiable trader (fund manager). This high frequency contrasts with the minimum 3-month portfolio holdings window observable from Securities and Exchange Commission (SEC) Section 13f lings in the United States. Hence, we know the entire portfolio of each fund manager (trader), the size of a funds individual holdings in each stock, the number of simultaneous traders within the sample for every time period, and the magnitude of their daily trade frequency. In addition, traditional empirical studies on blockholders use databases that dene the blockholder as a 5% shareholder. This is appropriate for studies on
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governance through voice, as a 5% stake may be necessary for a blockholder to exert control. However, control is not necessary for blockholders to exert governance through trading. Our database allows us to study blockholders with stakes below 5% that standard studies miss, but that may still engage in governance. Our study provides an opportunity to depart from most existing empirical analyses of rm blockholders that focus on various forms of control. Our paper aims to examine this governance mechanism by recognizing short-term patterns in the underlying trade orders that reveal information. This requires examining daily institutional investor trades, because investors break larger orders into smaller pieces (trades). We then reconstruct the underlying orders (i.e., comprehensive signed order ow) designated as packages identied to individual fund managers. We dene a trade package sequence, following Chan and Lakonishok (1995), which captures all trades over multiple days in the same direction for each stock, and not more than 5 business days apart. We close the trade package if there is a reversal trade in the same stock. This becomes the 1st trade in the next trade package. We designate swing trades as trading order sequences derived from microstructure models of multiple informed traders in receipt of the same (or correlated) signals, with 3 sequences executed through signed order ow: buysell-buy (BSB) or sell-buy-sell (SBS) trade packages. The justication for focusing on these order sequences is as follows. When a blockholder does trade, one cannot utilize a single buy or sell order as an indicator of informationbased trading, since the investor may simply be making a strategic decision to alter holding size in response to altering inuence opportunities, for example, by permanently exiting a stock. Similarly, a buy-sell or sell-buy sequence may simply be correcting a strategic error and need not indicate any intention to earn short-term trading prots. In contrast, the more peculiar BSB or SBS sequences undertaken over relatively short horizons (i.e., intra-quarter) are unlikely to have happened simply by chance. These patterns imply either the presence of private information on which the investment manager earns trading prots or some agency or other failure by the investment manager, for example, giving the appearance of doing something as an active manager even though these trading patterns have no value to the ultimate investor (Dow and Gorton (1997)). As we demonstrate below, these trade sequences are indeed protable after transaction costs, in support of the informed-trader microstructure literature such as Kyle (1984), (1985), (1989) and ruling out agency failure. Notably, an important feature of our unique data is that they contain the investment managers transaction costs, enabling us to distinguish between these two explanations. Having studied the protability of swing trading, we next analyze its impact on stock price informativeness. Our proxy for the theoretical concept of price informativeness is the decline in the relative spread as informed trading drives price toward fundamentals, as attested to by the microstructure literature on asymmetric information contained in the spread (e.g., Lin, Sanger, and Booth (1995)). In this paper, we show rst that short-term swing trades make up a sizable 39% of all fund-manager trades by volume. Second, short-term swing trading is protable, with one swing sequence yielding on average a 2.72% return prior to transaction costs with an excess return of 0.90% after transaction costs, thereby
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establishing that such trading is informed. Returns are generally highly statistically signicant, and this remains true even after transaction costs. Third, swingtrading protability diminishes by 24 basis points (bp) for each additional swing trader. This is supportive of the multiple informed-trader microstructure models of Admati and Peiderer (1988), Holden and Subrahmanyam (1992), and Foster and Viswanathan (1993), (1996). Fourth, such trading activity produces improved pricing efciency in the form of lower bid-ask spreads. For each additional fund manager trading simultaneously, the spread reduces by 92 bp. Hence, if the original spread were 1%, then each additional manager would reduce the spread by 0.0092%. Fifth, we also nd that higher price informativeness in the form of lower spreads is associated with higher subsequent long-term rm performance. This result is consistent with the rm managers actions having a more sensitive effect on stock price when stock price is more informative and with the governancethrough-trading models of Holmstrom and Tirole (1993), Admati and Peiderer (2009), Edmans (2009), and Edmans and Manso (2011). For example, the presence of a swing-trade sequence in the previous month is associated with an approximately 3% excess return over the next year, with the decline in the spread playing an important role. After controlling for the presence of a swing trade, there is still an apparent improvement of 67 bp for each 10% reduction in spread due to swing trades. Sixth, when fund managers do not trade at all, there is around 2% subsequent rm performance improvement that is signicantly different from 0, but that is also signicantly lower at the 1% level than the rm performance improvement after swing trades of 4.62%. This result does not rule out the effectiveness of voice but does suggest that swing trades are associated with signicant future increases in rm performance. Seventh, swing-trading protability improves in the percentage size of the investment managers initial holdings until the manager reaches an optimal holding size of 2.96% of shares outstanding. Finally, investors who have larger holdings are more likely to swing trade, and to swing with greater magnitude, in keeping with the greater protability of their swing trades. The optimal size of initial holdings from a swing likelihood and magnitude perspective is between 2.3% and 2.5%. The contribution of initial stock holdings to apparent future outperformance over the following year is optimal when it reaches 1.94% and is thus less than the nearly 3% optimal holding from the swing trading protability perspective. The following section provides background to the study and reviews the literature, and then Section III develops 7 underlying hypotheses. Section IV provides a description of the data and institutional arrangements affecting the investment management process for our sample of institutional investors. Section V presents the empirical results, and in Section VI we present our conclusions.
II.
Background and Literature
Kyle (1984), (1985) makes a seminal contribution by modeling informed riskneutral insider trading in the presence of random noise traders and competitive risk-neutral market makers, and by introducing a crucial concept, stock price informativeness. Admati and Peiderer (1988), Holden and Subrahmanyam (1992),
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and Foster and Viswanathan (1993), (1996) all show that multiple informed traders improve price informativeness compared to a single informed trader, with more rapid release of private information. None of the theoretical contributions discussed so far make the important link between stock price informativeness, managerial effort, and subsequent rm performance. Holmstrom and Tirole (1993) take the important 1st step of incorporating the rm manager into Kyles (1985) original single informed-trader framework. As stock price becomes more informative of the managers actions when the trader spends resources to gain a better signal of future value, rm performance improves.1 Two important recent contributions to this literature add to our understanding of governance through trading. First, Admati and Peiderer (2009) provide a model based on a single large exogenously informed blockholder faced with agency problems.2 Second, Edmans (2009) likewise poses an agency problem in a framework that differs from Admati and Peiderer (2009) in that information acquisition is endogenous.3 An important conceptual advance in Admati and Peiderer (2009) and Edmans (2009) is recognizing that most institutional investors (blockholders) do not directly intervene in an effort to inuence managerial decisions (e.g., mutual funds). Furthermore, Edmans (2009) recognizes that these investor classes typically do not short-sell. He demonstrates that now the incentive to acquire information is increasing in block size, whereas with unrestricted short-selling, block size is irrelevant to information acquisition, as in Holmstrom and Tirole (1993), or information acquisition and thus block size is exogenous, as in Admati and Peiderer (2009). This might suggest that block size in Edmans (2009) is unbounded, but since the blockholder needs to credibly exit when in receipt of a bad signal, this imposes a liquidity requirement in the form of a sufcient number of liquidity traders. Consequently, the optimal blockholder size is nite with an interior solution, and the impact on future performance is concave in block size, as we empirically demonstrate. A second set of predictions arising from Edmans (2009) is that the information release by blockholder trading gives rise to future rm outperformance that is also concave in the initial blockholder size, as we also empirically demonstrate. Since swing trades reduce the information asymmetry content of the spread,
1 In Faure-Grimaud and Gromb (2004), price informativeness is relevant, but not because it improves the managers incentive to perform (there is no managerial action) but because it encourages other investors to make value-adding interventions. 2 First, the manager may take an action that is bad from the perspective of shareholders but that privately benets the manager. Second, the manager may take action that is good for shareholders but for which the manager incurs a private cost. The authors show that it can be credible to threaten exit in the 1st disciplinary problem even though this could be costly to the blockholder. They also show that threat of exit can actually exacerbate the 2nd problem. 3 In his model of the threat of exit, the manager who fails to meet earnings targets is adversely impacted. The manager therefore cares about short-term pricing. However, if the manager does more to benet shareholders by making long-term intangible investments, this can adversely affect the shortterm public signal. For example, the rm might report low earnings, but the public is not aware that this is due to the manager making the correct value-maximizing long-term investment in invisible intangible assets. An informed large blockholder can help to overcome the resulting managerial myopia by not selling when the public receives the bad signal if they are able to discern the managers long-term investment (good private signal).
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irrespective of the nature of the swing trade, we show that the more negative the change in the spread, the greater the subsequent rm outperformance. With multiple traders and a correlated signal, too much trading occurs from the standpoint of any single investor faced with unwanted competition, as shown in the models of Kyle (1984) and Admati and Peiderer (1988). A larger number of informed traders is associated with greater trading volumes and thus higher price informativeness. This informed trading activity credibly rewards (penalizes) the manager whose stock holdings are exogenously given and whose hidden actions are likely to be personally costly if benecial to rm value. From these important conceptual advances made by Kyle (1984) and Admati and Peiderer (1988), the work of Edmans and Manso (2011) links multiple informed traders to rm value, with their main prediction being that subsequent outperformance increases in price informativeness. A determinant of price informativeness is the number of informed blockholders trading simultaneously. Several empirical papers shape our method and hypotheses. Bennett, Sias, and Starks (2003) nd that changes in institutional demand affect future prices, indicating that institutional investors possess information; however, their study does not address whether specic trading patterns incorporate information. Sias, Starks, and Titman (2006) nd evidence to suggest that institutional investors possess better information, on average, and that security prices incorporate their information when they trade. In particular, they nd the number of institutional traders plays an important role in determining quarterly returns, even though some of these traders are relatively small, supportive of our as well as and Edmans and Mansos (2011) focus on the number of informed traders. Yan and Zhang (2009) nd that short-term trading by institutional investors forecasts future returns, while long-term investor trades do not, making clear that institutional investors obtain information for short-term trading purposes. Hence, it makes sense for these short-term investors to exploit their informational advantage. Boehmer and Kelley (2009) show that, even apart from trading, it is institutional ownership outside the 5 most concentrated institutional investors that is particularly associated with greater pricing efciency. Moreover, the explanation is not due simply to liquidity. Larger holdings by institutional investors mean greater information acquisition, as we conrm. Boehmer and Kelley also nd that multiple informed traders who are more competitive and less concentrated drive these efciency gains, even in periods when no trading occurs. Their conclusions are consistent with what we nd: Institutional investors outperform by approximately 2% per annum, even when not trading at all, most probably because of better stock selection. McCahery, Sautner, and Starks (2011) provide a strong endorsement of the role of institutional trading on stock price informativeness with their nding that 80% of responding institutional investors are willing to vote with their feet by selling their shares. The existing empirical literature illustrates why it is vital to rule out longerterm sequences that do not alter in sign, contrary to our BSB or SBS swing sequences. Parrino, Sias, and Starks (2003) nd that sales by large institutional investors can predict forced chief executive ofcer (CEO) turnover, and Chen, Harford, and Li (2007) nd that independent institutional investors change their holdings well in advance of extremely bad or good acquisition announcement
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returns. In contrast, swing trades are relatively neutral with respect to net holdings, which change little and thus can encapsulate an aggressive informed trading story while also being inconsistent with simple optimism or pessimism informational stories exemplied by these prior studies. Bharath, Jayaraman, and Nagar (2013) take a different perspective than ours on blockholder numbers and price informativeness by providing what they term indirect tests of the predictions of Admati and Peiderer (2009) and Edmans (2009). They examine the impact of exogenous liquidity shocks on the interaction between blockholder ownership and rm value. Consistent with their hypothesis, they nd that positive liquidity shocks (e.g., decimalization) enhance blockholder value. In a similar vein, Edmans, Fang, and Zur (2013) nd that activist hedge funds are more likely to acquire blocks in liquid stocks as investors exercising governance through trading. Moreover, such listings lead to positive and signicant announcement effects on the stocks in question.
III.
A.
Hypotheses
The Link between Stock Price Informativeness and Trade Sequences
As shown in the basic model of Edmans and Manso ((2011), Prop. 13), stock price informativeness, and thus the rms future stock price, must be increasing in the number of simultaneous informed traders and the volatility of the underlying signal received by informed traders. However, this contention gives little guidance as to when one should measure these determinants of stock price informativeness, for example, the number of simultaneous traders or even stock price informativeness itself. For example, should one measure this whenever there is a single trade, or whenever there is a special sequence of trades or underlying orders indicating precise informational advantage? The more precise are signals received by informed traders, the more informative is the stock price. A core contribution of the current paper is in establishing the critical role of these special trade sequences (swing trades) that generate stock price informativeness and are associated with spread reductions and subsequent outperformance. B. Relative Signicance of Swing Trades
We rst establish that swing-trading activity forms a very signicant proportion of all investment manager trades.4 If they only contributed to investment manager trades trivially, they would be hardly worth mentioning. Far from large shareholdings being predominantly stable, as is required for the effective exercise of the blockholder voice proposition, short-term swing trading is a major activity that forms a very signicant portion of overall stock turnover.
4 By contrast, Dow and Gorton (1997) explain allegedly excessive trading (from a control perspective) by institutional investors with respect to delegated portfolio management, in terms of clients unable to distinguish between managers simply doing nothing and actively doing nothing by trading to excess (e.g., by churning). While possibly less pejorative, we believe the term swing trades is a more apt description.
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C.
The Hypotheses
For the trading view of investor monitoring to be substantive, investment managers must be in receipt of valuable information. Thus, swing trading must be protable to undertake, even after accounting for trading costs and ex post selection biases.5 Hence, our 1st hypothesis, stemming from the informed-trader models of Kyle (1984), (1985), (1989), Holden and Subrahmanyam (1992), Foster and Viswanathan (1993), Admati and Peiderer (1988), (2009), and Edmans (2009) among others, asserts that H1. Swing trades are protable on a net basis after accounting for transaction costs and ex post selection bias. Following Edmans (2009), our associated hypothesis asserts that H2. Net protability after transaction costs is increasing in the investment managers initial holdings but at a sufciently diminishing rate, such that an optimal interior solution exists. An additional requirement, from the perspective of synchronized informed trading based on swing trades, is that investment managers are subject to competitive pressure from similar investment managers wanting to trade in the same direction, due to some correlation in the signal. The greater is the number of investors trading, the lower the value of any such signal is to each investor. Only single-period or static versions of microstructure models with multiple traders in receipt of the same signal, such as Kyle (1984) and Admati and Peiderer (1988), actually support this monotonicity hypothesis, since dynamic models such as Holden and Subrahmanyam (1992) and Foster and Viswanathan (1993) predict that as few as 2 competing traders sufce to eliminate trading profitability. These dynamic models even question our 1st hypothesis, H1, as they predict zero protability for 2 or more traders. A step fall between 1 and 2 investors as in the dynamic theory is not sufcient. Hence, our 3rd hypothesis asserts that H3. Institutional investor trading protability is declining in the number of investors trading simultaneously when institutional investors execute swing trades. It is an implication of the microstructure literature (e.g., Kyle (1984), Admati and Peiderer (1988), and Edmans and Manso (2011)) that market resiliency (the inverse of Kyles (1985) market impact, ) is increasing in the number of informed traders trading simultaneously. Hence, our 4th hypothesis asserts that
5 It is critical to exclude ex post selection bias, sometimes known as look-ahead bias, when assessing the protability or otherwise of swing-trade sequences relative to other sequences or individual trades. Bias arises if the denition of a trading sequence such as buy-sell-buy uses information to dene the 3rd sequence that was not available at the times of the 1st and 2nd sequences. For example, suppose a manager buys a stock when it is below his target price, sells it when it rises above his target price, and buys it again when it falls below his target price. A simple crude computation of protability summed over each stage and based on the prices at each stage would falsely nd that this sequence was protable, whereas the 2nd successful buy was unknown at the time of the initial buy followed by a sell trade. Hence, one reaches a false inference of trading prowess. We overcome this bias when making comparisons by marking all possible trade sequences, such as a single buy or buy followed by a sell, or a swing-trade sequence to-market at the end of the same 3-month horizon so that the protability of every sequence is computed precisely on the same uniform basis with no ex post selection bias.
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H4A. Pricing efciency, as captured by lower bid-ask spreads, is increasing in the number of institutional investors who are trading simultaneously when institutional investors execute swing trades. Given a direct connection between price informativeness and trade aggressiveness, a variant on this hypothesis is H4B. Pricing efciency is also improving in the magnitude of swing trades. Since Edmans (2009) proposes that trades by institutional investors with higher initial holdings in a stock are more likely to contain information, an additional variant is H4C. Pricing efciency is improving in initial managerial holdings at a diminishing rate. Our 5th hypothesis stems from the postulated role of stock price informativeness in the governance-through-trading models of Holmstrom and Tirole (1993), Admati and Peiderer (2009), Edmans (2009), and Edmans and Manso (2011) and the critical link between stock price informativeness and swing trades discussed in Section III.A. It states that H5. The greater the pricing efciency as measured by the spread reduction brought about by swing trades, the greater should be the rms subsequent outperformance. There are other sequences besides swing trades exhibiting trade reversals, potentially indicating information. Others include buy-sell and sell-buy within our short-term 3-month horizon but indicate less intensive short-term trading activity without the peaks and troughs generated by swing trades. We test the subsidiary hypothesis that these sequences result in lower subsequent rm outperformance due to smaller information content (H5Sub1). Additional subsidiary hypotheses arise from the possibility that our traditional microstructure spread measure of informativeness does not fully capture the change in price for a given change in stock fundamentals, for which there may not exist any perfect empirical proxy. Hence, we add subsidiary hypotheses: Even after controlling for our spread measure of informativeness, two of the determinants of informativeness (i.e., the number of informed blockholders choosing to trade (H5Sub2) and the magnitude of swing trading (H5Sub3)) will add explanatory power, as these will be imperfectly correlated with our informativeness measure. If blockholders govern exclusively by exercising voice, then a regression of subsequent outperformance on our spread measure of informativeness (due to H5), the number of swing trades after controlling for informativeness (due to H5Sub2), and dummy variables for blockholders that choose not to trade should reveal that price informativeness and swing trading are irrelevant. Only the dummy variables for blockholders choosing not to trade should be relevant. Alternatively, if price informativeness and trading sequences matter, performance should also depend on the spread reduction (according to H5). However, blockholders who neither exercise voice nor trade in a particular month may still outperform the market due to the long-lasting effects of stock selection skills exercised in previous periods when they did trade. In point of fact, our sample of investment
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manager blockholders only hold a portion of the larger stocks making up the Standard & Poors (S&P) 200 and S&P 300 Index Returns and display average outperformance of approximately 2% per annum. Thus, the greater the importance of trading sequences is relative to blockholders that choose not to trade, the more price informativeness matters relative to voice or even simple stock-picking ability for whatever reason. Hence, our 6th hypothesis asserts that H6. If investment managers do not trade, there will be evidence of signicant rm (baseline) outperformance. When swing trading does reduce spreads, additional induced outperformance signicantly exceeds this baseline. Edmans (2009) shows theoretically that the larger the stockholding in a given stock, the greater the incentive to gather information for long-only investors. Thus, the likelihood of informed swing trades increases in initial holding size as none of our sample of investment managers short-sell. The 7th hypothesis states H7A. The larger the investment managers initial stake in a stock, the greater the likelihood of that manager undertaking swing trades, H7B. The greater is the number of swing trades, and H7C. The greater is the magnitude of the swing trades.
IV.
Data
We develop empirical tests of the Admati and Peiderer (2009), Edmans (2009), and Edmans and Manso (2011) governance through trading hypotheses, together with tests of the associated Kyle (1984), (1985), (1989), Admati and Peiderer (1988), Holden and Subrahmanyam (1992), and Foster and Viswanathan (1993), (1996) microstructure models. As already noted, this requires identication of the number of agents trading, inclusive of very detailed short-term trading data, replete with trader identities and detailed transaction costs. The Portfolio Analytics Database (PAD) contains proprietary information pertaining to the daily trades and portfolio holdings of Australian investment managers in the domestic equities asset class. Thus, it does not focus solely on large blockholders. We asked investment managers to provide information for their 2 largest institutional-pooled Australian equity funds and to exclude index fund managers. PAD obtains historical month-end portfolio holdings and daily trading data for Australian equity managers with the support of Mercer Investment Consulting, and it contains historical information from January 2, 1994, to June 30, 2002. The data elds obtained for daily trading activities include the date of execution, Australian Securities Exchange (ASX) stock code, name, quantity traded, daily weighted average price of the trade, explicit transaction costs (brokerage) incurred, and even the identity of the broker. We received a complete data set of all trades and holdings for that period (including equities, convertibles, options, etc.). We supplemented our database with stock price data sourced from the ASX Stock Exchange Automated Trading System (SEATS). SEATS contains all trade information for stocks listed on the ASX, with stock-specic data such as prices, returns, market capitalization, and spreads. Index changes to the S&P/ASX 300 Index Return are also located in the SEATS database. SIRCA (Securities Industry Research Centre of the Asia-Pacic) Limited provided access to the Aspect
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Huntley Fin Analysis accounting database for the calculation of book-to-market ratios. Our sample of actively managed institutional Australian equity funds employed in this study comprises 38 funds from 30 unique active institutions. Benchmarking of all Australian equity funds in this database occurs to either the S&P/ASX 200 or S&P/ASX 300 Index Returns. This database provides a sample that is representative of the Australian investment management industry. It includes data from 6 of the 10 largest fund managers, from 6 of the next 10, from 4 of those managers ranked 2130, and from 14 managers from outside the largest 30 (of funds under management as of December 31, 2001). The sample also includes 6 boutique rms that manage less than $A100 million each. Many previous papers, including Brands, Brown, and Gallagher (2005), utilize PAD. Our data set constitutes around 10% of funds under management in the asset class as reported by the fund performance-monitoring rm ASSIRT (now owned by Standard & Poors). However, if the data that fund managers provide is representative of their entire Australian operations, as the fund managers claim, then the effective coverage is over 50%, as 12 of the top 20 fund managers provide us with data.6 In Table 1, we summarize the holdings according to the number of stocks held by individual managers and the combined holdings for all 30 managers in the PAD sample. Panel B shows the latter. It can be seen from Panel A that if we adopt the standard denition of a blockholder owning 5% or more of a stock,
TABLE 1 Descriptive Statistics of Substantial Manager Stock Positions
Table 1 presents a number of descriptive statistics concerning the blockholder status of the investment managers in the Portfolio Analytics Database (PAD) sample. In Panel A (Panel D), we measure the average number of stocks (index weight) each month where individual managers in the PAD sample hold over 0.5%5% of the total market capitalization of a company. In Panel B, we measure the combined holding of all managers in our sample. Panel C (Panel E) measures the average number of stocks (index weight) each month in which our managers have engaged in swing trading when they hold over 0.5%5% of the total market capitalization of a company. Description 5% 4% 3% 2% 1% 0.5%
Panel A. Number of Stocks Individual Managers Hold Over x%

Mean Median StDev Minimum Maximum 25 25 10 2 43 33 33 12 2 52 44 47 16 2 69 69 74 23 9 113 128 111 47 25 225 209 182 81 46 385
Panel B. Number of Stocks Held by All Sample Managers Holding Over x%

Mean Median StDev Minimum Maximum 30 33 12 2 49 42 46 17 2 67 58 56 25 2 99 86 78 32 13 136 125 126 36 29 179 157 156 36 48 208
(continued on next page)
6 A pertinent question is how large does a database have to be to gain status as representative of the population? Perhaps the most famous database used for studies of trading behavior is the large U.S. discount brokerage set of individual households utilized by Barber and Odean (2000). These households collectively made 3 million trades. By contrast, a recent study by Kelley and Tetlock (2013) utilizes a data set of U.S. 225 million household trades (75 times larger). In comparison to Barber and Odean, our database coverage is very large indeed.
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TABLE 1 (continued) Descriptive Statistics of Substantial Manager Stock Positions
Description
5%
4%
3%
2%
1%
0.5%
Panel C. Number of Stocks Swing Traded by Individual Managers Where Holding Over x%
Mean Median StDev Minimum Maximum 2.4 2.0 2.2 11.0 3.4 3.0 2.7 15.0 5.0 4.0 3.6 16.0 8.1 8.0 5.5 22.0 16.8 15.0 12.0 47.0 30.5 25.0 22.5 1.0 85.0
Panel D. Index Weight of Stocks Individual Managers Hold Over x%

Mean Median StDev Minimum Maximum 2.8% 1.2% 2.8% 0.1% 13.6% 6.0% 2.5% 7.9% 0.1% 34.9% 12.8% 4.2% 15.4% 0.2% 59.3% 29.9% 18.0% 26.3% 2.1% 80.0% 51.7% 61.9% 28.7% 6.3% 86.7% 68.5% 77.8% 19.7% 30.1% 88.9%
Panel E. Index Weight of Stocks Swing Traded by Individual Managers Where Holding Over x%
Mean Median StDev Minimum Maximum 0.3% 0.1% 0.4% 0.0% 2.4% 0.4% 0.2% 0.6% 0.0% 2.9% 0.7% 0.4% 0.9% 0.0% 3.6% 1.5% 1.0% 1.3% 0.0% 4.5% 6.2% 4.5% 6.8% 0.0% 34.1% 26.0% 19.5% 22.5% 0.1% 82.7%
then on average, only 25 stocks qualify. At the other extreme, the mean number of stocks held where the fund manager owns 0.5% or more is 209. In Panel C, we present the number of swing stocks within each category. The mean number of stocks swing traded in the blockholder category is only 2.4. It rises to 30.5 in the 0.5% or more category. Hence, our sample of investment managers does not consist typically of blockholders, according to the standard denition requiring 5% minimum holding. Moreover, we nd that highly informed stock swing trading is most likely to occur in stocks where our managers hold just under 3% of the shares on issue; thus, our sample incorporates bias against nding highly informed swing-trading activity, as this optimal holdings level lies toward the maximum holdings in our sample.
V.
A.
Results
Signicance of Stock Trading and Swing Trades
In this section, we determine the nature and signicance of equity stock trading by our sample of actively managed institutional equity funds and the signicance of swing trading within this overall pattern of trading. We employ the method of Wermers (2000), who decomposes equity mutual fund returns into the transaction costs incurred and net returns after transaction costs. We calculate overall turnover as the average of buys and sells during a certain period. Transaction costs are calculated using explicit brokerage costs provided by managers. Missing brokerage costs for trades comprise less than 8.6% of our trades by value (21.5% by number). Encountering this problem with just 4 investment managers, we use regression coefcients from investment managers with complete data to estimate the brokerage costs for the remaining managers (see Appendix A). We subtract the total transaction costs from a fund managers gross return to obtain
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the net return and express excess returns relative to the S&P/ASX 300 Index Return. Table 2 reports descriptive statistics on overall turnover and transaction costs for the entire sample of investment funds. The average annual turnover rate is 76%. Investors who are more active incur signicantly higher transaction costs. This activity does not appear to penalize investors, as there is no statistically signicant net return penalty. In fact, an overarching aim of this paper is to provide a satisfactory rationale for otherwise puzzling trading (from a control perspective) and, in particular, swing-trading activity.
TABLE 2 Descriptive Statistics of Institutional Investor Sample Showing the Turnover-Sorted Institutional Investor Return Decomposition
Table 2 provides a decomposition of Australian institutional investor returns contained in the Portfolio Analytics Database (PAD). At the end of each semiannual period from June 1999 to June 2002, we rank all funds in the database by their prior 6-month portfolio turnover level (the ranking period). Then we compute average statistics for each quartile (according to their prior portfolio turnover) over the following 6 months. These statistics are calculated using monthly manager positions: portfolio turnover, gross return, gross excess return (over the S&P/ASX 300 Index Return), transaction costs, net return (net of transaction costs), and net excess return (over the S&P/ASX 300 Index Return). The characteristic selectivity (CS), characteristic timing (CT), and average style (AS) are determined following the methodology of Wermers (2000). We annualize these statistics and calculate over all semiannual periods. *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. Gross Net Gross Excess Transaction Net Excess Avg. Turnover Return Return CS CT AS Costs Return Return No. (%/year) (%/year) (%/year) (%/year) (%/year) (%/year) (%/year) (%/year) (%/year) 6.6 5.9 6.3 5.6 6.1 6.1 114.6 77.8 62.2 44.3 70.3*** 76.1 9.49 10.33 9.93 9.83 0.34 9.88 3.07 3.92 3.40 3.27 0.20 3.40 1.77 2.92 2.40 2.00 0.23 2.26 1.40 0.97 0.52 0.74 0.66 0.92 6.32 6.44 7.01 7.09 0.77 6.70 0.80 0.54 0.46 0.41 0.39*** 0.56 8.13 9.23 8.91 8.86 0.73 8.76 1.71 2.82 2.38 2.30 0.59 2.28
Fractile Top 25% 2nd 25% 3rd 25% Bottom 25% Top-Bottom 25% All Funds
Table 3 provides descriptive statistics of overall trades and swing trades for our sample of investment managers. We report as all buys and all sells swing trades commencing with either a buy (i.e., BSB) or commencing with a sell (i.e., SBS) that complete within a 3-month horizon.7 Swing trades make up 33.5% (38.9%) of our investment manager trades (trade volume), with 65.8% of these trades occurring in the largest stocks, compared with 52.6% of all trades. This establishes our initial nding: Short-term swing trades comprise a signicant portion of the overall trading volume. Moreover, trading volume is itself quite signicant. When we analyze the number of days over which these trades are completed, we nd similar percentages comparing swing trades with all institutional trades in our database (see Appendix B). When we analyze all
7 One might question whether these trade sequences are due to fund inows and outows. As these funds are institutional in nature, small regular fund ows that would cause these trade sequences are unlikely; however, for robustness, we conservatively removed all buy (sell) trades in months where there were fund inows (outows). This removed 12% of trades in our sample but yielded similar results. In addition, our later nding of swing-trade protability supports our suggestion that these trade sequences are not the result of fund ows, which we would not expect to be predictive of individual stock returns.
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TABLE 3 Descriptive Statistics of Institutional Investment Manager Trades
Table 3 measures the percentage of our institutional investor buy, sell, swing-trading buy and swing-trading sell trades (trade volume gures are in parentheses), split by stock size quintile, and the number of package days over which we split our trade. We dene swing trades as the following trade sequences: i) purchase, sale, purchase and ii) sale, purchase, sale, completed over a period of less than 3 months. Packages are dened following Chan and Lakonishok (1995), who use a 5-day gap denition of a package, implying that a new package begins when there is a 5-day gap between manager trades (in the same direction), or when the manager executes a trade in the opposite direction. Principal refers to the total traded value. The sample comprises all trades of 30 active Australian investment managers during the period January 2, 1994June 30, 2002. Nature of Buy, Sell, and Swing Packages 1 Day 23 Days 46 Days 710 Days 11+ Days
Panel A. All Buys (41,781 packages, $46.1 billion principal)

All Buys 1 (small) 2 3 4 5 (large) 7.0% of packages, 1.9% of principal 5.5% of packages, 2.0% of principal 12.5% of packages, 9.1% of principal 21.9% of packages, 17.3% of principal 53.1% of packages, 69.7% of principal 61.9 (25.3) 69.1 (43.9) 65.9 (37.9) 61.5 (26.4) 60.5 (24.5) 61.0 (24.4) 13.5 (14.4) 10.7 (12.8) 12.5 (15.6) 13.7 (12.2) 13.9 (13.8) 13.7 (14.8) 13.2 (18.0) 10.7 (14.9) 11.4 (12.7) 12.9 (17.1) 13.8 (19.4) 13.6 (17.9) 6.0 (14.6) 5.1 (11.7) 4.8 (14.1) 6.2 (13.0) 6.1 (16.2) 6.2 (14.5) 5.4 (27.8) 4.4 (16.8) 5.4 (19.6) 5.7 (31.3) 5.7 (26.1) 5.5 (28.4)
Panel B. All Sells (32,609 packages, $35.4 billion principal)

All Sells 1 (small) 2 3 4 5 (large) 7.7% of packages, 2.1% of principal 5.6% of packages, 2.0% of principal 12.1% of packages, 8.2% of principal 22.5% of packages, 18.3% of principal 52.1% of packages, 69.4% of principal 61.9 (27.7) 66.5 (44.1) 62.5 (31.0) 59.5 (32.9) 59.4 (23.0) 62.2 (27.5) 15.2 (16.5) 12.2 (12.5) 14.7 (13.4) 15.4 (14.0) 15.5 (16.6) 15.6 (17.0) 12.3 (18.6) 11.4 (14.7) 11.9 (20.0) 13.5 (20.2) 12.3 (18.3) 12.4 (18.6) 5.9 (14.6) 5.4 (12.7) 6.2 (13.5) 6.3 (12.9) 7.1 (16.5) 5.5 (14.5) 4.7 (22.6) 4.5 (16.0) 4.7 (22.1) 5.3 (20.0) 5.7 (25.6) 4.3 (22.4)
Panel C. Swing Buys (12,698 packages, $16.8 billion principal)

All Buys 1 (small) 2 3 4 5 (large) 3.0% of packages, 0.6% of principal 2.9% of packages, 0.8% of principal 9.3% of packages, 8.4% of principal 19.0% of packages, 13.6% of principal 65.8% of packages, 76.6% of principal 58.9 (19.3) 71.1 (36.7) 71.4 (42.0) 57.9 (16.9) 58.4 (19.8) 58.0 (19.1) 13.7 (14.4) 9.0 (10.1) 9.0 (19.1) 15.3 (12.1) 13.3 (14.1) 14.0 (14.7) 14.8 (17.7) 12.4 (16.6) 10.2 (11.7) 14.0 (16.4) 14.6 (17.9) 15.2 (17.8) 6.2 (14.5) 4.7 (27.0) 5.2 (9.5) 6.3 (11.9) 6.7 (17.2) 6.2 (14.2) 6.4 (34.1) 2.8 (9.6) 4.2 (17.7) 6.5 (42.7) 7.0 (31.0) 6.6 (34.2)
Panel D. Swing Sells (12,240 packages, $14.9 billion principal)

All Sells 1 (small) 2 3 4 5 (large) 3.0% of packages, 0.7% of principal 3.0% of packages, 0.9% of principal 9.1% of packages, 5.9% of principal 19.1% of packages, 13.8% of principal 65.9% of packages, 78.7% of principal 61.2 (23.7) 67.8 (56.3) 64.4 (28.0) 63.8 (28.9) 59.7 (21.0) 60.8 (23.4) 15.9 (16.2) 13.7 (9.2) 13.1 (12.8) 13.6 (13.3) 15.8 (16.3) 16.5 (16.5) 12.6 (20.2) 10.3 (7.5) 9.6 (12.3) 12.5 (20.9) 12.6 (18.6) 12.8 (20.6) 5.9 (16.6) 5.9 (14.4) 8.0 (18.1) 6.2 (14.2) 7.2 (20.6) 5.5 (16.1) 4.4 (23.3) 2.3 (12.6) 4.9 (28.8) 3.9 (22.7) 4.7 (23.5) 4.4 (23.4)
fund-manager trades, we nd packages make up, on average, 90% of an average days trading volume. This suggests active institutional investors are stealth traders who frequently split up trades over multiple days to limit information revealed via trading and to reduce market impact.
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B.
Protability of Swing Trades and Ex Post Selection Bias
Governance through trading requires investors to observe a signal of future stock value and to trade protably based on this signal (H1). We now investigate whether the swing-trade sequences identied in Table 3 meet our criteria. In Table 4, we measure the excess return for fund-manager swing trades, that is, 3 successive trade packages (dened according to Chan and Lakonishok (1995)) made up of a purchase (sale), sale (purchase), and purchase (sale). Completion of 3 successive trades must take place within 3 months (or the period shown on the left-hand side of Table 4). For example, a trading sequence whereby a manager purchases, then sells, then sells again (after a break of more than 5 days, so that the trades are not packaged) before nally purchasing, would not be included,
TABLE 4 Performance of Swing Trades Using Manager Trade Prices after Transaction Costs over Short- and Long-Term Horizons
Table 4 measures excess stock return (over the S&P/ASX 300 Index Return) around the following trade sequences: i) purchase, sale, purchase and ii) sale, purchase, sale. These trade sequences occur over the interval in the left-hand column. Return is calculated using the institutional investment managers actual average trade package price such that the excess return After Buy, Before Sell is calculated as the price return between the purchase and sale price that the manager actually obtained less the market return from the 1st day of the purchase to the 1st day of the sale. We model transaction costs as per the description in the text, and subtract from returns after purchases, but add to returns following sales. All gures (not in parentheses) are in percentages. *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. The numbers in parentheses are t-statistics.
Panel A. Buy-Sell-Buy Swing Trade

After Buy, Before Sell 0.08 (0.55) 0.26** (1.97) 0.68*** (5.10) 1.54*** (8.16) 1.04*** (2.64) 0.82*** (9.27) After Sell, Before Buy 0.12 (0.70) 0.31*** (2.64) 0.62*** (5.18) 0.83*** (5.52) 0.86** (2.18) 0.59*** (7.40)
Working Days Trade Allocation 5 Working days (t-statistic) 610 Working days (t-statistic) 1121 Working days (t-statistic) 12 months (t-statistic) 23 months (t-statistic) All trades < 3 months (t-statistic)
No. of Trades 552 1,290 2,326 1,936 856 6,960
Past 5 Days 0.07 (0.31) 0.40*** (3.04) 0.95*** (9.94) 1.28*** (12.03) 1.11*** (6.14) 0.89*** (15.47)
Next 5 Days 0.40 (1.23) 0.03 (0.13) 0.36** (2.36) 0.32** (2.08) 0.24 (0.98) 0.28*** (3.19)
Next 10 Days 0.22 (0.57) 0.02 (0.08) 0.33* (1.91) 0.43** (2.40) 0.09 (0.30) 0.26** (2.57)
Next 90 Days 0.17 (0.22) 1.12** (2.12) 0.04 (0.11) 0.38 (0.95) 0.17 (0.24) 0.36 (1.62)
Next 250 Days 1.56 (1.26) 1.51* (1.95) 0.42 (0.71) 0.55 (0.83) 0.50 (0.46) 0.63* (1.81)
Panel B. Sell-Buy-Sell Swing Trade

After Sell, Before Buy 0.16 (0.91) 0.30*** (2.91) 0.40*** (3.36) 0.99*** (4.62) 1.10** (2.53) 0.58*** (6.61) After Buy, Before Sell 0.38 (1.64) 0.41*** (3.53) 0.44*** (3.60) 0.58*** (2.84) 1.16*** (3.02) 0.55*** (6.46)
Working Days Trade Allocation 5 Working days (t-statistic) 610 Working days (t-statistic) 1121 Working days (t-statistic) 12 months (t-statistic) 23 months (t-statistic) All trades < 3 months (t-statistic)
No. of Trades 501 1,399 2,125 1,586 735 6,346
Past 5 Days 0.40 (1.53) 0.29** (2.42) 0.54*** (5.64) 0.52*** (4.18) 0.77*** (4.82) 0.50*** (8.51)
Next 5 Days 0.32 (0.89) 0.48*** (2.70) 0.35** (2.38) 0.45** (2.34) 0.47 (1.51) 0.42*** (4.60)
Next 10 Days 0.26 (0.65) 0.49** (2.35) 0.45** (2.55) 0.42** (1.96) 0.22 (0.51) 0.41*** (3.75)
Next 90 Days 1.14 (1.26) 0.03 (0.06) 0.89** (2.16) 0.27 (0.60) 0.03 (0.04) 0.32 (1.35)
Next 250 Days 1.72 (1.28) 0.80 (1.04) 1.88*** (2.89) 0.13 (0.18) 0.26 (0.23) 0.52 (1.42)
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as it does not t our criteria for a swing trade. This particular trade sequence would be classied as a purchase followed by a sale, and then a sale followed by a purchase. We calculate the return using the actual volume-weighted average price (VWAP) that the fund manager obtains for their trades, and we subtract (add) the explicit transaction costs from post-purchase (post-sale) excess return. We calculate all returns as excess returns relative to the S&P/ASX 300 Index Return, although using actual returns yields similar results. In the last 2 rows of Panel A of Table 4, we observe that fund managers prot from all trades in the BSB swing trading sequence, as they do for the SBS sequence in Panel B, which conrms hypothesis H1. In total, the net excess return to 5 days after the 2nd purchase is 1.69% (0.82 ( 0.59) + 0.28). In Panel B, fund managers prot after the initial sale and the reversing purchase, but not after the subsequent sale. The total net excess return to sales in Panel B is 0.71% ( ( 0.58) + 0.55 (0.42)). After partitioning these short-term trading sequences by the number of days in which they take place, we nd that trade reversals over intervals of less than 5 days (a short window, indeed) are not protable. However, trades taking place over a longer window appear to be protable. For periods ranging up to 3 months, we not only evaluate the protability of all reversed trades, such as the sequences buy-sell-buy, sell-buy-sell, buysell, and sell-buy, but we also evaluate all nonreversed trades that consist of simply a stand-alone buy or sell within every 3-month horizon. Hence, we are able to identify any ex post selection or look-ahead bias engendered by focusing solely on reversed trades. Were we to ignore the protability or otherwise of simpler nonreversed trades, we could articially inate the apparent protability of our trade sequences such as buy-sell-buy that include reversed trades. We evaluate the protability of nonreversed trades by marking-to-market at the end of the 3-month period, as we do for all trade sequences. Similarly, we assess the protability of nonreversed sale decisions by treating as a notional prot the difference between the initial sale price and the repurchase price after the lapse of 3 months, if this is even lower. If it is higher, then we attribute a notional loss to the initial sale. If the fund manager has no abnormal trading ability, then the excess prot from the ex post-selected swing-trading sequences will either be offset or more than offset by losses from the nonreversed marked-to-market trades at the end of the 3-month period. If the fund manager possesses trading ability in terms of the initial purchase or sale decision yet possesses no additional skills in terms of sequences of swing trades, then there will be no difference in protability between swing and nonswing trades (i.e., nonreversed, single purchases or sales, or a buy followed by a sell or sell followed by a buy). Finally, if the fund managers actions indicate access to valuable information about future rm performance that displays sequences of both good and bad news, then the protability of the swing trades will be higher than the protability of the nonswing trades. In Table 5, we aggregate all buys (sells) that have not been reversed, labeled Buy Only (Sell Only); trades that have been reversed only once, labeled Buy-Sell Only (Sell-Buy Only); and swing trades, labeled Buy-Sell-Buy (Sell-Buy-Sell). We nd for both buys and sells that swing trades are more protable than those
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trades that managers do not reverse, as well as those trades managers reverse only once, suggesting managers do indeed have sufcient access to information to prot from swing trading. Hence, we conclude that the protability of our swingtrading sequences is not due to ex post selection of these sequences when we consider all other possible short-term trading strategies over a 3-month window, further supporting our 1st hypothesis.
TABLE 5 Aggregate Protability of a Variety of Multiple Institutional Investor Trade Sequences
Table 5 measures the return of sequences of trades over a 3-month window with each sequence marked-to-market at window close. Buy (Sell) Only refers to nonreversed trades within the 3-month window. Buy-Sell (Sell-Buy) Only refers to trades that are reversed once only during the 3-month window. The sequence Buy-Sell-Buy (Sell-Buy-Sell) refers to reversal of trades followed by repurchase (resale) within the 3-month window. We calculate the excess return as the difference between the stock return and the S&P/ASX 300 Index Return. All gures not in parentheses are in percentages. *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. The numbers in parentheses are t-statistics. Protability of Trade Sequences Swing Sequence Buy-Sell-Buy (t-statistic) Buy-Sell Only (t-statistic) Buy Only (t-statistic) Sell-Buy-Sell (t-statistic) Sell-Buy Only (t-statistic) Sell Only (t-statistic) Return 2.72*** (19.27) 0.37 (1.49) 0.86*** (9.85) 1.04*** (6.75) 0.59*** (3.21) 0.20** (2.04) Excess Return 1.80*** (13.83) 0.49** (2.03) 0.25*** (3.06) 1.39*** (9.72) 0.67*** (3.93) 1.06*** (10.96) Excess Return (aft. trans. costs) 0.90*** (6.93) 0.11 (0.44) 0.55*** (6.66) 0.49*** (3.44) 0.07 (0.41) 0.76*** (7.87)
Figure 1 displays the average excess return around all swing trades made over an interval of less than 3 months, showing that over short-term intervals, investment managers on average appear to be able to buy when the stock price is low and sell when it is high. This is as if they are able to observe a (correlated) signal of future stock price. Fund managers express different proclivities with respect to swing trading, with 4 funds executing 70% of swing trades (by number of trades). In unreported results, we complete tests using the trades of these 4 managers, as well as the trades of the remaining sample, nding the difference between these 2 partitions is minimal. There is no consistent fund-manager style or size difference. There is also no identiable difference in the performance of these funds. However, it is possible to attribute the contribution to outperformance of these fund managers to their increased volume of swing trades. These swing trades comprise only 1.4% of the average managers excess performance over the S&P/ASX 300 Index Return (i.e., only a very small 1.4% of the 2.25 percentage point outperformance of our sample, i.e., 0.0315 percentage points). For the 4 most active funds, the contribution is higher, as they comprise 2.6% of the excess performance of these funds. Note that the rm outperformance subsequent to the swing trades is not included in the computation of swing-trading protability. While swing trades account for
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FIGURE 1 Excess Return (After Transaction Costs) Around Swing Trades
Figure 1 displays stock excess performance (over the S&P/ASX 300 Index Return) around the following swing-trade sequences: i) purchase, sale, purchase and ii) sale, purchase, sale. These trade sequences occur over less than 3 months. We used the VWAP as reported by the fund manager. We subtract transaction costs from (added to) the excess return after purchases (sales).
38.9% of overall manager trading volume (as measured by the dollar value), they account for a more signicant 63.4% for the 4 largest swing traders. These ndings elicit surprise from a control perspective, as they show that fund managers have substantial short-term turnover, which accounts for only a small (yet signicant) portion of their overall excess performance. These shortterm trades do not detract value, but rather result from superior information on the part of institutional investors, in support of H1. Next, we test Edmans (2009) conjecture giving rise to H2: that there exists an optimal size of our managers holding due to information increasing in initial holdings and the existence of liquidity constraints. We do this by including the managers percentage holding as well as the squared value of the managers percentage holding in the trade protability regression analysis presented in Table 6 (model 4). We not only nd support for H2 but also utilize the regression coefcients of the estimated quadratic prot function to nd that the prot-maximizing percentage holding of a stock to optimize swing-trading prots is high at 2.96%. The average (standard deviation of) manager percentage holding in stocks that are swing traded is 0.48% (0.94%), so only around 0.5% of observations are above 2.96%. C. Impact of the Trader Numbers on Trading Protability
A crucial requirement of our framework, inclusive of multiple institutional investor trading, which compels managerial effort, is the receipt by symmetric investors of correlated informational signals and consequently H3, which we also test in Table 6. Incidentally, this hypothesis represents the 1st formal empirical testing of one of the major predictions of the Kyle (1984) model using actual

TABLE 6
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Impact of Multiple Institutional Investors Swing Trading the Same Stock on Short-Term Trade Protability Utilizing Regression Analysis
In Table 6, we regress the package protability against a number of variables. The swing trades must have the following trade sequences: i) purchase, sale, purchase or ii) sale, purchase, sale. Protability is calculated as the excess return (over the S&P/ASX 300 Index Return) earned after the 1st trade, minus the excess return earned after the 2nd trade, plus the return earned in the 5 days following the 3rd trade. The independent variables include the number of different managers trading sequences completed over the previous month (Number of Investment Managers Trading in the Same Month), the maximum percentage deviation in stock holdings (from peak to trough), the managers percentage holdings of the stock, and the managers percentage holdings squared. Control variables include log(Market Capitalization), Book-to-Market Ratio, and 6m Momentum measures, a dummy variable equal to 1 if the swing sequence was Buy-Sell-Buy (rather than Sell-Buy-Sell), as well as the average change in manager weight over the previous month. *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. The numbers in parentheses are t-statistics. Model Variable Constant (t-statistic) log(Market Capitalization) (t-statistic) Book-to-Market Ratio (t-statistic) 6m Momentum (t-statistic) Net Invest. Mgr Change in Position (t-statistic) Number of Invest. Mgrs Trading in Same Month (t-statistic) Buy-Sell-Buy Dummy (t-statistic) Holdings Percentage Deviation (t-statistic) Mgr % Holdings (t-statistic) Mgr Squared % Holdings (t-statistic) No. of obs. R2 13,046 0.30% 13,046 0.31% 13,046 0.54% 0.0023*** (4.87) 0.0065*** (3.33) 0.0024*** (4.99) 0.0065*** (3.34) 0.0038 (1.14) 2.6243*** (8.34) 44.3681*** (5.77) 13,046 1.04% 1 0.0020 (0.24) 0.0006 (1.57) 0.0030 (1.46) 0.0048 (1.00) 2 0.0059 (0.65) 0.0005 (1.24) 0.0031 (1.49) 0.0046 (0.95) 3 0.0041 (0.49) 0.0006 (1.64) 0.0030 (1.47) 0.0033 (0.68) 0.0203*** (5.58) 0.0024*** (4.98) 0.0018 (0.83) 0.0023*** (4.93) 0.0064*** (3.31) 4 0.0031 (0.38) 0.0006 (1.46) 0.0032 (1.55) 0.0061 (1.27)
trading data. Importantly, we nd that trading protability does not disappear with just 2 or a few traders, as in the dynamic models of Holden and Subrahmanyam (1992) and Foster and Viswanathan (1993), (1996). Experimental evidence might explain this. Informed insider trading conforms to the model when subjects know the number of agents beforehand, but fails when the number of insiders is unknown (Schnitzlein (2002)). In our sample, there is a large pool of potentially informed traders, but it must be very difcult for any individual trader to predict the number of competitors when the individual/institution decides to trade. After controlling for a variety of factors including stock size, book-to-market ratio, and momentum, we nd that institutional trading protability reduces by 24 bp for each extra investor trading a stock. If the signals were uncorrelated, then profitability would be unaffected by the number of investment managers trading. D. Effect of the Number of Institutional Investors on the Bid-Ask Spread
The Kyle (1984), (1989) models, together with Holden and Subrahmanyam (1992) and Foster and Viswanathan (1993), (1996), predict that market depth should be greater and thus bid-ask spreads lower as the number of informed
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investors trading simultaneously increases. This then constitutes H4A, predicting that more informed traders acting simultaneously lower the spread. This is because trading more rapidly reduces asymmetric information the greater is the number of informed traders and the more informed is each trader. As noted previously, this spread reduction is related to, but not identical with, the more fundamental but not strictly observable price informativeness concept. We calculate the relative time-weighted bid-ask spread for the ith stock and tth period using intraday SEATS data provided by SIRCA based on the formula
n
Spreadi, t
j=1 n
(Aski, j Bidi, j ) Timei, j

(Aski, j + 2
Bidi, j )
j=1
Timei, j
In Table 7 we investigate the impact of investors swing trading the same stocks on the bid-ask spread using regression analysis. In the presence of informed traders, one expects reduced liquidity and depth due to greater adverse selection (see Hein and Shaw (2000) for evidence). However, following intense swing-trading
TABLE 7 Impact of the Number of Institutional Investors Trading Simultaneously on the Relative Time-Weighted Spread Utilizing Regression Analysis
In Table 7, we regress the change in (models 13) and actual (models 45) relative time-weighted spread against a number of variables before and after swing trades. The dependent variable for models 13 is the percentage change in spread, and for models 45 it is the spread after a swing-trade package. The swing trades must have the following trade sequences: i) purchase, sale, purchase or ii) sale, purchase, sale. The independent variables include variables equal to the number of different managers swing trading sequences completed over the previous month, the maximum percentage deviation in stock holdings (from peak to trough), the managers percentage holdings of the stock, and the managers percentage holdings squared. Control variables include stock size (log(Market Capitalization)), Book-to-Market Ratio, and 6m Momentum, the spread before the swing package, as well as the average change in manager weight over the previous month. *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. The numbers in parentheses are t-statistics. Model Variable Constant (t-statistic) Size (log(Market Capitalization)) (t-statistic) Book-to-Market Ratio (t-statistic) 6m Momentum (t-statistic) Net Invest. Mgr Change in Position (t-statistic) No. of Invest. Mgrs Using Swing Trades (t-statistic) Holdings Percentage Deviation (t-statistic) Mgr % Holdings (t-statistic) Mgr Squared % Holdings (t-statistic) Spread Before (t-statistic) No. of obs. R2 13,033 2.37% 13,033 2.39% 13,033 2.48% 1 0.0127 (0.81) 0.0017** (2.31) 0.0001 (0.02) 0.1477*** (16.34) 0.0105* (1.66) 0.0068*** (7.49) 2 0.0014 (0.08) 0.0014* (1.80) 0.0001 (0.02) 0.1484*** (16.40) 0.0101 (1.59) 0.0071*** (7.69) 0.0111* (1.77) 2.2327*** (3.74) 53.3276*** (3.66) 0.7583*** (173.71) 13,033 78.16% 2.8328*** (6.49) 58.5357*** (5.50) 0.7554*** (172.50) 13,033 78.23% 3 0.0123 (0.78) 0.0015** (1.99) 0.0003 (0.08) 0.1477*** (16.33) 0.0104 (1.64) 0.0067*** (7.38) 4 0.2459*** (19.55) 0.0062*** (11.15) 0.0078*** (2.75) 0.0648*** (9.83) 0.0042 (0.91) 0.0126*** (18.11) 5 0.2471*** (19.59) 0.0064*** (11.58) 0.0082*** (2.90) 0.0643*** (9.76) 0.0041 (0.90) 0.0127*** (18.24)
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activity, the most reasonable expectation consistent with our ndings is that formerly private information is now public. Sources of new private information to keep spreads wide have dried up, hence spreads now narrow. Table 7 reports the results, after controlling for a variety of factors including stock size, book-to-market ratio, and momentum. We nd in support of H4A that the greater the number of investors trading simultaneously in the stock, the greater the reduction in the spread. The average percentage reduction per extra manager is 0.92% when taken over the 5 sets of estimates. We also nd weak evidence for H4B that the larger the expected degree of trader aggressiveness in the form of a higher percentage deviation of stock holding from the highest to lowest, the greater the percentage reduction in the excess spread. Lastly, we nd there is no optimal size of a managers holding to reduce spread, as the greater the holdings (above 2.09%), the greater the reduction in spread. Spread continues to diminish in the square of the investment managers initial holdings, even though there are limits on the incentive to acquire information. E. Impact of Swing Trading (Nontrading) on Subsequent Firm Performance
In this section, we determine whether the improvement in price sensitivity to the managers action caused by informed short-term trades improves subsequent rm performance (i.e., H5). To conrm the unique nature of our swing-trading sequence in indicating informed trading, we create 2 dummy variables of alternative short-term trades, that is, (i) where an investor buys ((ii) sells) and then sells (buys) within the next 3 months, without buying (selling) again (H5Sub1). If swing-trading sequences are unique in terms of their ability to improve future performance, we expect these dummy variables to be less signicant than our swing-trading dummy variable. To test H5Sub2 and H5Sub3, we add the number of blockholder traders and the percentage deviation of holdings to our spread reduction measure as measures of trader aggressiveness that our spread reduction proxy for price informativeness may not fully capture. We regress subsequent rm performance over the next 12 months against these short-term trading variables together with controls. These control variables consist of the Carhart (1997) risk factors as well as the change in fund-manager weight. We include these in order to isolate the inuence of short-term trading behavior on rm performance. Due to the overlapping nature of the monthly observations and 12-monthly excess stock returns in this regression, we calculate tstatistics using robust standard errors, accounting for clustering in the 12-monthly excess stock return variable. This removes the effect of the overlapping sample in biasing t-statistics. Results reported in Table 8 indicate that rm performance over the subsequent 12 months is positively and statistically signicantly related to whether institutional investors engage in short-term swing trading (at the 1% level). The swing-trade dummy row of Table 8 in models 12, 6, and 810 indicates an economically signicant excess return of approximately 2% to 4.6% due to the completion of a short-term swing-trading sequence in the previous month. Model 3 shows that Buy-Sell-Buy sequences are far more inuential that Sell-Buy-Sell
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TABLE 8
Impact of Short-Term Institutional Investor Trading on Subsequent Firm Performance

In Table 8, we regress the 12m Excess Stock Return (over the S&P/ASX 300 Index Return) against a number of variables. The independent variables include a dummy variable equal to 1 when a manager has completed a swing trading sequence over the previous month (Swing-Trade (ST) Dummy), the number of different investment managers using swing trades over the prior month, the maximum percentage deviation in stock holdings (from peak to trough, Holdings Percentage Deviation), the managers percentage holdings of the stock, and the managers percentage holdings squared, as well as various dummy variables equal to 1 if the manager has completed various other trade sequences, as described in the variable name. We also include a variable proxying for the change in price informativeness due to the trade, the percentage change in the relative time-weighted spread. Control variables include market, size (SML), book-to-market (VMG), and momentum (HML) risk factors (calculated as per the Carhart (1997) factor methodology), as well as the average change in manager weight over the previous month. We calculate t-statistics using robust errors adjusted for clustering in the 12-month excess stock return (due to overlapping periods). *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. The numbers in parentheses are t-statistics. Model Variable Constant (t-statistic) Market Return (t-statistic) SML (Size Risk Factor) (t-statistic) VMG (Book-to-Market Risk Factor) (t-statistic) HML (6m Momentum Risk Factor) (t-statistic) Net Invest. Mgr Change in Position (t-statistic) ST Dummy (t-statistic) Buy-Sell ST Dummy (t-statistic) Sell-Buy ST Dummy (t-statistic) Buy-Sell-Buy Dummy (t-statistic) 1 0.0157*** (4.71) 0.2307*** (7.95) 0.0089 (0.60) 0.0767*** (3.70) 0.0968*** (6.00) 0.0012 (0.09) 0.0313*** (5.79) 2 0.0144*** (4.18) 0.2288*** (7.87) 0.0091 (0.61) 0.0763*** (3.68) 0.0966*** (5.98) 0.0021 (0.16) 0.0203** (2.19) 0.0081 (1.29) 0.0058 (0.73) 0.0344*** (4.13) 3 0.0160*** (4.82) 0.2304*** (7.93) 0.0087 (0.59) 0.0771*** (3.72) 0.0970*** (6.01) 0.0170 (1.15) 4 0.0201*** (6.15) 0.2441*** (8.43) 0.0098 (0.66) 0.0791*** (3.82) 0.1004*** (6.21) 0.0127 (0.92) 5 0.0190*** (5.77) 0.2381*** (8.19) 0.0097 (0.65) 0.0792*** (3.82) 0.0994*** (6.15) 0.0058 (0.41) 6 0.0159*** (4.77) 0.2332*** (8.03) 0.0088 (0.59) 0.0799*** (3.85) 0.0969*** (6.00) 0.0014 (0.10) 0.0320*** (5.90) 7 0.0192*** (5.83) 0.2405*** (8.27) 0.0095 (0.64) 0.0823*** (3.96) 0.0995*** (6.16) 0.0056 (0.39) 8 0.0156*** (4.68) 0.2302*** (7.93) 0.0091 (0.61) 0.0762*** (3.68) 0.0956*** (5.92) 0.0029 (0.22) 0.0195*** (3.14) 9 0.0006 (0.16) 0.2317*** (7.99) 0.0108 (0.73) 0.0718*** (3.47) 0.0955*** (5.92) 0.0029 (0.22) 0.0344*** (5.18) 10 0.0007 (0.17) 0.2314*** (7.97) 0.0104 (0.70) 0.0728*** (3.52) 0.0965*** (5.98) 0.0011 (0.09) 0.0462*** (7.81)
TABLE 8 (continued) Impact of Short-Term Institutional Investor Trading on Subsequent Firm Performance
Model Variable Sell-Buy-Sell Dummy (t-statistic) No. of Invest. Mgrs Using Swing Trades (t-statistic) Holdings Percentage Deviation (t-statistic) Spread After / Spread Before Swing Trade (t-statistic) SwingTradeDummy Mgr % Holdings (t-statistic) SwingTradeDummy Mgr Squared % Holdings (t-statistic) MgrHoldwNoSwingTradeDummy (t-statistic) MgrHoldNoSwingTradeDummy Mgr % Holdings (t-statistic) MgrHoldNoSwingTradeDummy Mgr Squared % Holdings (t-statistic) MgrNoSwingTradeDummy (t-statistic) MgrHoldwNoTradeDummy (t-statistic) No. of obs. R2 20,945 0.84% 20,945 0.85% 20,945 0.85% 20,945 0.70% 20,945 0.72% 20,945 0.85% 20,945 0.79% 20,945 0.98% 20,945 1.24% 0.0192** (2.18) 1 2 3 0.0059 (0.77) 0.0034** (2.29) 0.0084 (0.85) 0.0671*** (2.81) 0.0033** (2.24) 0.0099 (1.00) 0.0631*** (2.64) 7.5367*** (5.12) 193.9901*** (5.49) 7.5450*** (5.12) 4 5 6 7 8 9 10
194.0255*** (5.50) 0.0159*** (3.26) 2.8997*** (4.07) 58.5041*** (3.64) 0.0294*** (6.04) 0.0218*** (4.23) 20,945 1.03%
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450
sequences. The relative lack of statistical signicance of other sequences such as Buy-Sell and Sell-Buy shown in model 2 supports the 1st subsidiary hypothesis, H5Sub1. Model 4 indicates that the larger is one of our determinants of price informativeness, namely the holdings percentage deviation during a swing trade, the higher is future return. Similarly, model 5 indicates that the other determinant, the number of swing traders, also has a statistically signicant effect on future return. In models 6 and 7 of Table 8, we include our proxy for stock price informativeness, namely, the percentage reduction in relative time-weighted spread over the previous month in response to a swing trade, and thus test H5. Model 6 indicates that this informativeness measure is highly statistically signicant and adds another 42 bp to rm performance for every 10% reduction in spread, even after including the dummy variable for the swing trade that by itself indicates 3.2% outperformance. The signicance of the spread reduction remains even after replacing the swing-trade dummy variable by the number of investment managers using swing trades and the magnitude of the deviation in the swing trade in model 7. Hence, we nd support for H5. Since the number of investment managers swing trading remains signicant but not the magnitude of the swing, we nd support for subsidiary hypothesis H5Sub2 but not H5Sub3. Following Edmans (2009), we also include the managers percentage of shares outstanding for each stock in the portfolio, and the squared value of the managers percentage outstanding in models 8 and 9 of Table 8 with similar highly statistically signicant ndings. We solve for the maximum rm performance using the coefcients in model 8 to show that the optimal manager percentage holding that maximizes subsequent rm outperformance is 1.94%. As acknowledged in H6, investment managers may possess stock selection skills or utilize voice in addition to information that results in swing or other forms of trading. It is therefore essential to set a baseline benchmark for swing trades that recognizes skills in both stock selection and voice and in trading other than of the swing variety. In our sample, investment managers hold just over 50% of the available stocks at any one time. Hence, managers could outperform the market based simply on their portfolio choice, or by combining portfolio selection with voice. Model 9 of Table 8 is similar to model 8 in that it shows the effect of holding size and square of holding size on the degree of outperformance, but it now includes nontraded holdings as well as swing-traded holdings. The results conrm that the Edmans (2009) informational advantage effect in holding size extends to nontraded stocks. Again, we can solve for a maximum initial holding size for nontraders that in model 9 is 2.48%. Hence, rm performance is diminishing in holding size above 2.48%, indicating that voice is unlikely to have been successful. This is because larger holdings would normally help to overcome the free-riding behavior of other blockholders. Thus, if voice were responsible, we would anticipate nding increasing, not diminishing, returns to the exercise of voice. In model 10 of Table 8 we include dummy variables to capture 3 events when a manager either: i) engages in swing trading, ii) trades in the stock but does not swing trade, or iii) holds the stock but does not trade. We nd that portfolio selection and voice in the absence of all trading results in baseline rm outperformance
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over the next year of 2.18% over and above the S&P/ASX 300 Index Return. Hence, the portfolio benchmark is already a high hurdle. Trades in stocks that represent sequences other than swing trades do not signicantly outperform the portfolio benchmark. However, swing-traded stocks outperform the index by a considerable 4.62%, as shown by the magnitude of the swing-trade dummy variable. This outperformance is signicantly different at the 1% level from stocks not swing traded. Our ndings on rm outperformance subsequent to swing trades provide insights as to the relative performance contribution to the total return to the investment manager. Over our entire sample, direct swing-trading protability explains only about 3 bp of investment manager outperformance. However, subsequent outperformance over the next year from holding these stocks adds another 38 bp of excess return. Hence, the quotient of long- to short-term outperformance is approximately 12.67 times. Total swing-trading-related outperformance represents 18% of the overall outperformance for our sample. While these gures are overall, for funds that undertake a higher proportion of swing trading, the 1-year outperformance is much higher, peaking at 170 bp. For such funds, the indirect benets of swing trading contribute to a sizable portion of the investment managers overall outperformance. F. Are Institutional Investors with Larger Holdings More Likely to Swing Trade?
Edmans (2009) conjectures that the larger the stockholding, the greater the incentive to gather price-sensitive information (H7A). We also extend (H7A) to anticipate that the greater the number of swing trades (H7B) and the greater the magnitude of these trades (H7C), the higher is the managers percentage share of total holdings. To test these conjectures, for each 3-month period and stock, we create a swing-trading dummy variable equal to 1 if the fund manager engaged in swing trading (when a manager has a trading sequence i) buy-sell-buy or ii) sell-buy-sell) during that quarter and in that stock, and 0 otherwise. For each manager, our sample only includes those stocks in which a manager has traded more than twice (over the life of our sample), as it is unrealistic to expect a manager to swing trade a stock the manager has never held. We regress this dummy variable using Logit and Tobit regressions against stock and manager characteristics calculated over the past period as well as the current period. This should determine whether, for example, past volatility affects fund-manager swing trading or current volatility. As established in the extensive microstructure literature, commencing with Kyle (1984), (1985), trading aggressiveness will be higher, the larger the number of informed traders. Hence, we include the number of swing trades as one of our dependent variables that we wish to explain in Table 9, since we believe it captures informed trading and thus one aspect of trade aggressiveness. Stock characteristics and controls include size, book-to-market ratio, prior 3-month stock momentum, stock volatility, turnover, spread, prior 3-month S&P/ASX 300 Index Return, and stock return volatility. Measurement takes the form of ranks between 0 and 1; hence, the smallest (largest) stock receives a value of 0 (1) for each quarter.
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TABLE 9 Characteristics of Institutional Investor Swing Trades and Relation to Investor Percentage Holdings
In Table 9, we use regression methodology for the dependent variable (both listed in the model number headings) regressed against a number of independent variables (listed in the row headings). Regression methodology includes Logit and Probit for our swing-trading dummy variable (equal to 1 in the quarters in which our manager completes the sequence i) buy, sell, buy or ii) sell, buy, sell). Tobit is used for our swing-trading number (the number of times a manager swing trades within the quarter), swing-trading performance (the average performance of the swing-trading sequence), and the average percentage holdings deviation of the manager over the swing-trading sequence. Independent variables include log(Market Capitalization), book-to-market ratio, prior 3-month stock return and volatility, prior 3-month relative bid-ask spread, and stock turnover. We also calculate prior 3-month index return and volatility. Lastly, we include a variable equal to the managers percentage holdings of the stock and the managers percentage holdings squared, log(manager size), prior 6-month manager performance and portfolio turnover, and dummy variables equal to 1 if our manager has a growth, style-neutral, or value style. In the rst 6 models we use prior data in order to calculate the independent variables, whereas in the last 2 models we use current data that we calculate during the period in which we measure our dependent variable (swing-trading dummy). *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. The numbers in parentheses are t-statistics. Model 1 Dependent Variable Regression Methodology Period Calculation of Independent Variables Constant (t-statistic) log(Market Capitalization) (t-statistic) Book-to-Market Ratio (t-statistic) 3m Stock Return (t-statistic) 3m Stock Volatility (t-statistic) 3m Index Return (t-statistic) 3m Index Volatility (t-statistic) Swing Dummy Logit Previous 11.30*** (47.16) 0.38*** (40.72) 0.33*** (5.26) 0.01*** (2.79) 3.53** (2.45) 0.61** (2.11) 14.55* (1.89) 2 Swing Dummy Probit Previous 3.81*** (46.80) 0.11*** (35.47) 0.26*** (8.58) 0.01** (2.23) 3.17*** (4.45) 0.49*** (3.45) 19.76*** (5.19) 3 Swing Number Tobit Previous 19.72*** (45.25) 0.57*** (38.65) 1.38*** (8.41) 0.01** (2.00) 21.75*** (6.03) 2.92*** (4.00) 105.05*** (4.66) 4 Swing Performance Tobit Previous 1.17*** (35.20) 0.03*** (24.67) 0.05*** (3.82) 0.01* (1.75) 0.80*** (2.97) 0.14** (2.51) 6.08*** (3.54) 5 Holdings Deviation Tobit Previous 2.71*** (46.28) 0.07*** (34.24) 0.24*** (9.67) 0.01** (2.56) 2.03*** (3.62) 0.33*** (2.93) 14.28*** (4.33) 6 Swing Dummy Probit Previous 3.25*** (42.39) 0.07*** (23.98) 0.29*** (9.38) 0.01** (2.29) 2.46*** (3.46) 0.29** (2.00) 12.41*** (3.28) 7 Swing Dummy Logit Current 13.20*** (51.97) 0.45*** (46.32) 0.32*** (4.96) 0.01*** (2.95) 2.53* (1.72) 0.08 (0.28) 4.28 (0.55) 8 Swing Dummy Logit Current 11.07*** (42.93) 0.20*** (15.41) 0.30*** (4.70) 0.01** (2.42) 8.59*** (5.81) 0.10 (0.34) 13.64* (1.73)
TABLE 9 (continued) Characteristics of Institutional Investor Swing Trades and Relation to Investor Percentage Holdings
Model 1 Dependent Variable Regression Methodology Period Calculation of Independent Variables 3m Relative Bid-Ask Spread (t-statistic) Stock Turnover (t-statistic) Invest. Mgr % of Stock Holdings (t-statistic) Invest. Mgr Squared % of Stock Holdings (t-statistic) Invest. Mgr Size (t-statistic) Growth Invest. Mgr Dummy (t-statistic) Value Invest. Mgr Dummy (t-statistic) Style-Neutral Invest. Mgr Dummy (t-statistic) Prior 6m Invest. Mgr Performance (t-statistic) Prior 6m Portfolio Turnover (t-statistic) No. of obs. R 2 (%) 182.43*** (29.35) 3,818.00*** (19.67) 0.03*** (5.65) 0.13*** (2.64) 0.12*** (2.32) 0.11** (1.97) 0.38 (1.10) 1.76*** (21.63) 8,283,100 7.31 92.01*** (29.21) 1,965.10*** (22.46) 0.01*** (3.36) 0.05** (2.09) 0.07*** (2.98) 0.03 (1.04) 0.05 (0.25) 0.80*** (19.07) 8,283,100 6.29 434.24*** (23.92) 9,219.30*** (19.80) 0.04*** (2.89) 0.12 (0.91) 0.16 (1.21) 0.29* (1.94) 0.82 (0.90) 4.16*** (19.52) 8,283,100 99.8 24.80*** (18.76) 529.57*** (15.42) 0.01** (2.13) 0.01 (0.47) 0.01 (0.72) 0.01 (0.42) 0.01 (0.18) 0.21*** (13.46) 8,283,100 99.79 57.77*** (21.46) 1,234.40*** (17.81) 0.01 (1.59) 0.01 (0.27) 0.04** (2.08) 0.01 (0.64) 0.01 (0.02) 0.64*** (19.15) 8,283,100 99.79 Swing Dummy Logit Previous 193.28*** (11.30) 2 Swing Dummy Probit Previous 96.76*** (14.18) 3 Swing Number Tobit Previous 488.63*** (13.63) 4 Swing Performance Tobit Previous 23.56*** (9.63) 5 Holdings Deviation Tobit Previous 71.77*** (13.65) 0.01*** (29.29) 92.47*** (29.49) 2,019.30*** (23.05) 0.08*** (3.53) 0.06** (2.49) 0.10*** (3.99) 0.02 (0.72) 0.09 (0.50) 0.85*** (20.17) 8,283,100 6.84 196.61*** (31.85) 3,946.40*** (20.87) 0.03*** (5.09) 0.09* (1.75) 0.09* (1.68) 0.12** (2.23) 0.08 (0.26) 1.84*** (23.18) 8,383,500 10.58 6 Swing Dummy Probit Previous 7 Swing Dummy Logit Current 216.66*** (11.05) 0.21*** (23.20) 170.26*** (27.36) 3,453.50*** (18.31) 0.04*** (6.46) 0.04 (0.80) 0.01 (0.19) 0.12** (2.22) 0.02 (0.07) 1.86*** (23.53) 8,383,500 11.17 8 Swing Dummy Logit Current
Gallagher, Gardner, and Swan 453
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Manager characteristics include the logarithm of fund size (log(fund size)), style (dummy variables for growth, value, and style-neutral managers), prior 6-month performance, prior 6-month stock turnover, the manager percentage holdings of the stock, and the squared percentage holdings of the stock. In Table 9, we impute from the coefcients on the investment managers percentage holdings and square of holdings, shown in models 18, the optimal percentage holding of a stock for a manager to own in order to maximize both the likelihood of swing trading and the magnitude of swing trades (performance). These range between 2.3% and 2.5%. These results provide strong support for H7A. Importantly, we nd evidence that also supports H7B and H7C, since both the number of swing trades (model 3) and the magnitude of the swings in swing trades (model 5) are increasing in the investment managers percentage holdings where a manager owns less than 2.3% to 2.5% of the stock. Hence, fund managers choose to swing trade stocks when they possess informational advantage. Larger stocks are more likely to be swing traded. High stock turnover also encourages swing trading, since it is an indicator of noise-trader volatility and an ability to disguise informed trades in the crowd. Swing trades are also more likely when the bid-ask spread is low. These ndings suggest a higher likelihood of swing trading in liquid stocks with low transaction costs (and in stocks that account for larger weights in the underlying benchmark index). This is not surprising, as round-trip transaction costs would be prohibitively expensive in small stocks and, therefore, would tend to erode any prot realization. This is also consistent with another trading-related intervention explanation due to Maug (1998). Maug shows that increased liquidity is useful for institutional monitoring, as it enables fund managers more easily to recover their intervention costs through informed trading activity. Fund-manager swing trading also increases with respect to the past 3-month stock return (i.e., momentum), which responds negatively to the past 3-month stock volatility, book-to-market ratio, current stock return volatility, and prior index return. It also predicts better managerial performance that we observe in the form of higher post-swing stock price performance. Largefund managers with high turnover are more likely to execute these trades.
VI.
Conclusions and Suggestions for Future Research
We believe our study is the rst to test hypotheses arising from the Admati and Peiderer (2009), Edmans (2009), and Edmans and Manso (2011) governance-through-trading models. We show that short-term swing trades are protable (thereby containing private information); that protability increases in the size of initial holdings at a diminishing rate (establishing an optimal holding size of approximately 3%); and that protability decreases when there are simultaneous traders (showing that competition has been brought about by investors able to observe correlated signals). These informed trading sequences are associated with statistically and economically signicant rm outperformance over the next year. This performance rise is increasing in the extent to which swing trading increases price informativeness. Sizable rm outperformance from swing trading exceeds outperformance
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from stock-picking skills or exercise of voice. Larger fund managers with larger individual stock holdings are more likely to swing trade (indicating that such investors have more incentive to acquire information) and to swing trade more intensively. Moreover, information acquisition is subject to diminishing returns, as swing-trading effectiveness is not only increasing in initial holdings but also at a diminishing rate. The most likely explanation is the adverse effect of information on stock market liquidity as holding size increases. An important additional aim of this study has been to show how high levels of investment manager short-term trading activity is not evidence of actively doing nothing at the expense of clients. Rather, it is fundamental to value-enhancing pressure placed on rm management due to exposing the consequences of managerial actions more rapidly in stock price. This is associated with longer-term outperformance for both institutional investors and shareholders of the rm in question. Many extensions to our study are possible. These are likely to integrate market microstructure with agency theory, corporate governance, funds management, and even behavioral nance. A natural extension to our study would be to analyze how different degrees of opacity or transparency in trading mechanisms impact the nature of trading activity motivated by information.
Appendix A. Explicit Transaction Costs

In Table A1, transaction costs are calculated using explicit brokerage costs provided by managers. However, given that 4 of our sample of investment managers did not provide the brokerage costs for their trades, we modeled brokerage costs using the data we did have, thereby estimating the brokerage for the missing values. Missing values make up less than 50% of our trades.
TABLE A1 Explicit Transaction Costs
In Table A1, we regress the explicit brokerage costs for trade packages against a number of independent variables: manager style dummy variables (growth or value), log(manager size), and broker dummy variables (for the most popular 7 brokers who account for the majority of manager trades). We dene trade packages according to Chan and Lakonishok (1995), where a package ends after a 5-day period of no trades or a trade is made in the opposite direction. All beta values are in basis points. *, **, and *** indicate signicance at the 90%, 95%, and 99% condence intervals, respectively. Variables Constant Growth Manager Value Manager log(Manager Size) Broker 1 Broker 2 Broker 3 Broker 4 Broker 5 Broker 6 Broker 7 All Trades 25.63*** 8.51*** 6.13*** 6.18*** 7.13*** 2.52 1.10 3.71* 1.88 3.62 0.26
Appendix B. Descriptive Statistics of Institutional Investment Manager Trades Including the Number of Swing Traders
Table B1 presents a number of descriptive statistics concerning our manager buy and sell trades, as described in the panel titles.
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TABLE B1 Descriptive Statistics of Active Institutional Investor Trades Including the Number of Swing Traders
In Table B1, we calculate average daily volume and volatility over the past 3 months. Packages are dened following Chan and Lakonishok (1995), who use a 5-day gap denition of a package, implying that a new package begins when there is a 5-day gap between manager trades (in the same direction), or when the manager executes a trade in the opposite direction. The sample comprises all trades of 30 active Australian investment managers during the period January 2, 1994June 30, 2002. No. of Invest. Mgrs Swing Trading the Same Stock Statistical Summary All Buys 1 2 3 4 5 All Sells 1 No. of Invest. Mgrs Swing Trading the Same Stock 2 3 4 5
Panel A. Shares Traded (thousands)

Mean Median StDev 25% 75% 99% 168 21 551 4 106 2,263 170 19 626 3 98 2,554 179 22 569 4 109 2,681 155 19 592 4 91 2,073 159 23 424 4 102 2,088 165 25 439 5 121 2,000 161 25 537 5 117 1,982 161 21 694 3 105 1,977 160 24 417 4 114 1,989 162 26 478 5 117 2,402 189 27 603 4 120 2,327 145 28 372 6 124 1,651
Panel B. Dollar Value of Package ($thousand)

Mean Median StDev 25% 75% 99% 1,099 162 3,157 32 754 15,251 639 84 1,965 16 391 9,117 930 160 2,526 32 671 12,050 1,027 176 2,829 41 735 13,808 1,296 250 3,251 41 1,035 14,394 1,858 308 4,731 71 1,574 25,439 1,052 192 2,709 38 835 12,843 635 99 2,229 17 437 7,948 871 172 1,959 36 722 9,054 1,157 220 3,032 55 834 14,294 1,259 229 2,999 44 1,054 14,146 1,446 363 3,106 75 1,324 15,054
Panel C. Package Size Relative to Normal Trading Volume

Mean Median StDev 25% 75% 99% 0.90 0.12 2.23 0.02 0.62 12.10 1.00 0.12 2.44 0.02 0.66 13.15 1.00 0.15 2.40 0.02 0.71 13.05 0.71 0.11 1.78 0.02 0.51 9.91 0.80 0.11 2.06 0.02 0.56 10.70 0.82 0.11 2.07 0.02 0.60 10.91 0.90 0.14 2.15 0.02 0.65 11.77 0.97 0.13 2.36 0.02 0.68 13.29 1.02 0.16 2.34 0.03 0.74 12.64 0.91 0.14 2.22 0.03 0.63 12.35 0.91 0.13 2.18 0.02 0.67 11.55 0.72 0.14 1.66 0.03 0.59 8.70
Panel D. Package Size Relative to 95th Percentile of Trading Volume

Panel E. Average Daily Volatility (%)

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JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS doi:10.

Vol. 48, No. 2, Apr. 2013, pp. 427458

Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Background and Literature

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Panel A. Number of Stocks Individual Managers Hold Over x%

Panel B. Number of Stocks Held by All Sample Managers Holding Over x%

(continued on next page)

Journal of Financial and Quantitative Analysis

Panel D. Index Weight of Stocks Individual Managers Hold Over x%

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Panel A. All Buys (41,781 packages, $46.1 billion principal)

Panel B. All Sells (32,609 packages, $35.4 billion principal)

Panel C. Swing Buys (12,698 packages, $16.8 billion principal)

Panel D. Swing Sells (12,240 packages, $14.9 billion principal)

Gallagher, Gardner, and Swan

Protability of Swing Trades and Ex Post Selection Bias

Panel A. Buy-Sell-Buy Swing Trade

No. of Trades 552 1,290 2,326 1,936 856 6,960

Panel B. Sell-Buy-Sell Swing Trade

No. of Trades 501 1,399 2,125 1,586 735 6,346

Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

(Aski, j Bidi, j ) Timei, j

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

Impact of Short-Term Institutional Investor Trading on Subsequent Firm Performance

(continued on next page)

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Journal of Financial and Quantitative Analysis

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

(continued on next page)

Gallagher, Gardner, and Swan 453

Journal of Financial and Quantitative Analysis

Conclusions and Suggestions for Future Research

Gallagher, Gardner, and Swan

Appendix A. Explicit Transaction Costs

Journal of Financial and Quantitative Analysis

Panel A. Shares Traded (thousands)

Panel B. Dollar Value of Package ($thousand)

Panel C. Package Size Relative to Normal Trading Volume

Panel D. Package Size Relative to 95th Percentile of Trading Volume

Panel E. Average Daily Volatility (%)

Gallagher, Gardner, and Swan

Journal of Financial and Quantitative Analysis

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Gallagher, Gardner, Swan ('13) - Gov

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